Only Who Should Prevent Forest Fires?
Adaptation costs will be big. How big depends on who’s paying…
Fast-moving and exceptionally intense mega-fires have become the “new abnormal” here in California. These fires are out, for now. Thank you heroic firefighters! But the fight over who should bear the costs of damage compensation and risk mitigation is heating up.
An image of the Camp Fire on Nov. 8 from the Landsat 8 satellite.
Image credit: USGS/NASA/Joshua Stevens
Failures of power lines and other electrical equipment rank among the top causes of California wildfires. Citing wildfire liabilities upwards of $30 billion, the state’s largest electric utility filed for bankruptcy last week.
There’ve been plenty of headlines about this being the first of many “climate change bankruptcies”. But climate change is only one forcing factor in this case. These fires would not be so big if we did not send power through thousands of miles of tinderbox forest at high-risk times. Liabilities would not be so large if fewer people lived in high fire-risk areas. And, importantly, the size of these risks and costs would be different if they were borne differently.
It’s clear that we need to accelerate our efforts to mitigate and physically adapt to climate change. But it’s also clear that contracts between insurers, regulators, utilities, and customers have to change to reflect these mounting fire risks. High stakes decisions about how costs are shared will have big implications for how the risk gets managed and at what price.
Who should bear the fire risk?
Over the past 2 years, California has spent over $1.3 billion fighting wildfires. In 2017, insured property losses from California wildfires exceeded $13 billion. Insured losses from the 2018 Camp and Woolsey fires are now estimated in the range of $15-19 billion. The majority of these costs were incurred in the “wildland-urban interface” (WUI) where houses are located in or near wildland vegetation.
The WUI occupies less than one-tenth of the land area of the contiguous United States, but accounts for 43 percent of all new houses built between 1990-2010. Why are so many people moving into these areas, despite the mounting wildfire risk? One factor is that housing tends to be less expensive in these more peripheral areas. But these housing prices do not fully reflect wildfire risk.
Suppose that you, like me, dream of someday moving to a place where the California wilderness is your backyard. Given mounting fire risks, we aspiring WUI-dwellers should consider not only the sublime benefits of being surrounded by wilderness but also the risk that our wilderness home will burn down.
Under current law, however, California property owners (and their insurance companies) are entitled to compensation for any property damage if electrical equipment operated by utilities caused the fire, even if the utility was operating in full compliance with regulations. This “inverse condemnation” rule is an important contributing factor behind the PG&E bankruptcy.
Proponents argue that inverse condemnation “entitles property owners to just compensation if their property is damaged by a public use.” Others note that, if inverse condemnation were overturned, this would render large swaths of the WUI uninsurable (because insurance companies would have to take on a larger liability). But these arguments in favor of preserving the status quo seem to ignore the fact that fire risk and fire damages increase with the number of people living in or close to wilderness areas. Inverse condemnation is just one of the ways that California subsidizes construction in fire-risk areas. If insurance companies and property owners were exposed to more of the risk, we’d see fewer people moving into California’s WUI.
Fighting fire in Napa. credit: Josh Edelson, Getty Images
I’m not suggesting that all people living in high-risk areas should bear all the fire-related property damages (a substantial cost if you divide the substantial annual liabilities across the estimated 2 million homes located in high-risk areas). It’s important that utilities and other agencies bear some responsibility so they have an incentive to take actions to mitigate risk. And there are obvious fairness concerns with hitting current WUI/wilderness residents with significant increases in insurance costs, especially given that all Californians have played a role in turning up the global temperature. But shielding WUI/wilderness dwellers from mounting fire risks will result in too many people choosing to live in high-risk areas. And that’s a big reason to reform how wildfire risk sharing works in California.
An ounce of prevention…
California wildfires are expected to become even more intense in future years. In addition to re-thinking risk sharing, we have to up our prevention game. There are many mitigating steps that power companies could consider taking (or are already taking). These include more vegetation management (estimated costs as high as $150 billion) and “undergrounding” of power lines which PG&E estimates would cost approximately $3 million per mile.
PG&E crews work in Santa Rosa to replace underground electric and gas lines. (Photo by Deanna Contreras.)
All of these (expensive!) mitigation measures focus on fireproofing the existing grid infrastructure. But an alternative or complementary tack involves changing how power follows through the network. California utilities have the authority to disconnect service when fire risk is extreme. In contrast to other prevention strategies which will take years and billions of dollars to implement, “de-energizing” power lines when the fire risk is high should be relatively quick and easy, right?
Wrong. Highly charged debates about when and how to de-energize are complicated by a tension between the obligation to provide a reliable power supply to all customers and the obligation to protect against fire risk. If you live in a wilderness area, you are understandably concerned about having your power shut off as a fire moves in.
But what if a more aggressive de-energizing strategy were coupled with investments in distributed generation and storage that help high-risk communities become more self-sufficient? What if remote communities could self-power their emergency needs from a locally managed extra-safe private network? What if new housing developments in high-risk areas were built as self-contained micro-grids?
One of our super-star Berkeley graduate students, Will Gorman, has been digging into the economics of distributed generation in California and beyond. He estimates, based on future cost projections, that a self-contained solar PV with battery storage system in some high-risk counties could meet 95% of the electricity needs of a typical residential customer for an annual investment cost as low as $1500 (or 100% at costs in the range of $3000-$6000). Alternatively, less expensive storage (without solar) would allow residents to maintain supply through de-energizing events.
California has already earmarked $800M for self-generation and battery storage and mandated increases in distribution-level storage. If storage and solar investments were targeted at high-risk areas, perhaps this could help clear a path for more aggressive de-energizing strategies.
Adapting to the new abnormal
Californians are going to pay, one way or another, to adapt to mounting fire risks. These costs will manifest as higher electricity bills, higher taxes, higher insurance premiums, or all of the above. How we adapt will depend in part on how the bill is split, which makes this a fascinating and first-order policy problem.
If all of the liability for fire damage from electrical equipment lies with the utilities, and if prevention efforts focus primarily on fireproofing the grid (versus changing how power flows across the grid), fire prevention costs and damages will be higher than they need to be. To bring these costs down, we need to rethink how costs and liabilities are assigned. And think creatively about how to meet electricity demand in high-risk areas. Politically, preventing wildfires in California may prove to be more challenging than containing them once they start. But given the devastatingly high stakes, this is political capital worth spending.
Source (Chuck Grimmett/Flickr/CC BY-SA 2.0)
Suggested citation: Fowlie, Meredith. “Only Who Should Prevent Forest Fires?” Energy Institute Blog, UC Berkeley, February 4, 2019, https://energyathaas.wordpress.com/2019/02/04/only-who-should-prevent-forest-fires/
Thanks Meredith for kicking off this important debate, which I suspect will be around for quite a while. And, double thanks for putting local power alternatives on the table as a safety strategy. The history of microgrid research has some notable examples of microgrids being demonstrated for a variety of purposes, sustainability, simple economics, homogeneous power quality, market aggregation, etc. If disaster strikes at the location though, and the microgrid is seen to perform well during it, policymakers pay attention. Most notably, this happened with the Sendai Microgrid and others during the 2011 Great East Japan Earthquake and tsunami, and similarly with the Princeton and NYU campuses and other sites during Superstorm Sandy the following year. Thereafter microgrid development in both jurisdictions has been stimulated by programs such as the New York Prize, which is full-bore resiliency driven. This happens on a smaller scale too. The good performance of the Borrego Springs demonstration during a September 2013 storm reoriented that project towards resilience. Here’s my prediction: fires will do the same for microgrid development in California as an earthquake and storms have done elsewhere. This is California, so an earthquake is coming soon, but the great performance of the Sendai Microgrid depended in part on Japan’s robust high pressure natural gas network, which we don’t yet have. The unraveling of PG&E signals the unraveling of the traditional electricity delivery model. Indicative perhaps is the microgrid definition given in SB-1339, which has a strong resilience component.
This discussion reveals an inconsistency in our current logic re a utility’s obligation to serve. If a utility is required to provide service to homes in an area prone to natural disaster it should not also be saddled with the liability for compensating the customers for the damage. PG&E was put in an untenable position. The societal impact of bankrupting the utility is a net negative for the state of California.
If people choose to live in areas prone to disasters (including flooding, hurricanes, and earthquakes) they should bear the full risk of the consequences, including payment of high insurance premiums. If they cannot afford the insurance they have the choice of bearing the full risk or not living in that area. It’s that simple.
Too many people want a free or subsidized lunch.
One of the most important incentives in capitalism, if it is to delivered the promised benefits, is that companies that fail to perform fail financially. PG&E has a long history of repeatedly failing–on this issue as far back as 1992 when the CPUC first detected that the company was diverting vegetation management funds to shareholder returns instead. Bankruptcy is the needed catalyst to make the needed transformations in our energy system.
I’m not going to get into the morass of whether, or to what extent, PG&E failed to deliver in the past because it has little relevance to the current wildfire obligations.
Firstly, one needs to recognize that a profit-regulated industry is a special form of capitalism in that the upside rewards to shareholders are capped at a modest level. In return for accepting this limited return the investors must be assured that there is a limit on the risk, otherwise there won’t be any investments made. The accepted principle is that a utility’s shareholders are provided with a fair opportunity to earn a risk-adjusted, compensatory return on invested capital if management’s decisions are prudent.
Thus, if a utility is obligated to serve customers in high risk areas the utility should be held harmless for any damages those customers incur when a natural disaster occurs, which is what the wild fires are given how dry the vegetation was, even if its properly maintained equipment started the fire. The alternative is to allow the utility to choose which customers it will serve.
There is also the issue of whether the utility’s increased liability of serving high risk customers should be subsidized by customers living in low risk areas. Why should homeowners choosing to live in these high risk areas be subsidized by everyone else? The cost of bankrupting PG&E will adversely impact all of its customers.
So if you can prove in a court of law that PG&E was grossly negligent in its operations and that directly caused the Camp and/or Woolsey wild fires, then, yes, PG&E should be held liable for the damage. But that is not the major point I was making.
Actually, much of what PG&E has done up to this point has led to this situation and its liabilities. You can’t simply dismiss those actions because they are inconvenient to your argument.
As for the rewards to shareholders, the returns to IOUs have been extraordinary. As pointed out by Jim Lazar on this blog previously, the market to book value for California IOUs have been running nearly 2 to 1. PG&E’s value finally fell after the San Carlos explosion that then revealed PG&E’s mismanagement of its gas assets.
And regardless of whether the utility is profit regulated, it must be able to suffer the consequences of bankruptcy exposure to be see the incentives of capitalism. If instead you want to protect shareholders from bankruptcy, then we have lost a large part of those incentives and we might as well have publicly owned utilities if ratepayers are going to have to bear all of the risks.
If you’r ignoring that PG&E’s faulty equipment or its management of its system is being held responsible for the fires, then you are making a hypothetical argument that really isn’t relevant here.
I won’t go into the incentives for development on the WUI, but I agree that is a critical issue. But trying to claim that the utilities shouldn’t be held liable because of problems in other areas is not a valid argument.